L6 Long-term Liability Management PDF

Lesson 6 LONG-TERM LIABILITIES MANAGEMENT INTRODUCTION The discussion will cover the acquisition of vehicle and house through long-term loans. It will include the pros and cons of in-house and bank financing for car loans. It will also include the comparison of buying and renting...

Lesson 6 LONG-TERM LIABILITIES MANAGEMENT INTRODUCTION The discussion will cover the acquisition of vehicle and house through long-term loans. It will include the pros and cons of in-house and bank financing for car loans. It will also include the comparison of buying and renting a house and the costs of owning a house. LEARNING OBJECTIVES 1. Distinguish in-house and bank financing 2. Compute and compare payment methods 3. Recognize the advantages, disadvantages and costs of buying a house LECTURE DISCUSSION OWNING A VEHICLE While forking out a huge chunk of cash is the cheapest way to pay for a car, it’s also the payment method that not everyone could easily afford. Most car purchases are done through installments (car financing) offered by banks or a car dealer, spreading the payment to as long as 5 years. Though at the end of the payment term, car buyers end up paying for more, the payment is easier to manage. There are two types of car financing – dealership and bank loan. These two are both convenient ways to own a car without putting a big dent in one’s cash flow. Depending on financial capacity, one can be more beneficial than the other. In-house or Dealership Financing This is the financing option best for people who have not built a strong relationship with their banks. It’s practically easier to apply for than a bank car loan, however it does have its own sets of pros and cons that needs to be weighed before considering getting a car from one. Pros  It presents a certain level of convenience to car shoppers as most of the time the financial information will be handled first. The salesperson the buyer will be working with will know what budget is exactly before showing a single car.  Even if the budget can get to a passable used car, in-house financing can offer a newer, more comfortable, and better-looking car that’s still within the budget.  They are willing to work with people who cannot pass bank car loan qualifications, as long as the car buyer is able to provide the down payment for the car and good enough income documents.   If one is looking to drive out of a car dealership for as little as 10% down payment and take as long as 72 months to pay off the balance, this is the best financing option for him. Cons  The longer the payment term, the lower the down payment, the higher the interest rate.  Due to the leniency of their approval process, their interest rates are usually higher than banks. Pro tips  It still pays to go dealer-hopping for the best financing packages and deals among different dealerships. Aside from having different vehicles to offer, their interest rates, payment terms, and overall payment package may differ.  There’s no such thing as free chattel mortgage or comprehensive insurance. Any deals offering these will probably have higher interest rates per year. In effect, the cost of the “free” items is just being hidden elsewhere to make the deal look more attractive.  Forgo additional rustproofing offers. Cars these days are manufactured with a high degree of corrosion resistance, they don’t rust unduly without being affected by an external factor. Almost all modern cars don’t rust proofing.  Forking out more cash for the down payment will minimize the amount that needs financing. This means getting a lower loan amount, equating to a lower number of interest payments to make. The longer the loan duration, the more interest needs to pay as well. Bank Car Loan In-bank financing for car purchase is quite straight forward but also more complicated. There will be no middleman (dealer) involved, thus the buyer has to liaise with his car dealer and bank by himself. The good thing about this though is that it eliminates additional commission charged on top of the purchase, so interest rates will be lower than dealership financing. However, banks are commonly known for their strict requirements that not everyone could meet. Only people who has a good relationship with their bank or those who have a good credit history to show can easily apply for one. Pros  They are established lenders and are not likely to pull some of the tricks that ‘cheap money shops’ and other third parties sometimes engage in.  In addition to a bank car loan, banks can also help with mortgages and other forms of loans. Some banks can apply a home equity loan or home equity line of credit to an auto loan.  Some banks will allow one to get pre-approved for a car loan, if he’s been using their service for a long time and have a good record with them.  Utilizing the bank’s other products such as their credit card or other accounts can get one discounts on interest rates, as well.  Lower interest rates than car dealership financing. Cons  Rates are often non-negotiable, especially the down payment, and this can vary from bank to bank.  Stricter Requirements. Doing business with the bank for a long time isn’t even enough to guarantee an approval for a car loan. One’s credit record must also be stellar in order to easily qualify. Applying for a car loan in a bank that one has not been engaged with is even harder. Banks have a set of specific  conditions and documents required for approval. One is likely to qualify for an auto loan if he fits these criteria: - An employed Filipino individual less than 70 years old by the time the loan matures; - With a monthly income of ₱30,000 or more; - Buying either a brand-new or used car that’s no older than five years; and - Only needs to loan 80% of the total amount needed to purchase the vehicle.  Since a bank will just provide financing outside the deal with a car dealer, the buyer has to do all the paperwork himself and communicate with both to process his car purchase. Sample computation 20%down 30%down 40%down payment payment payment Down payment ₱243,600 ₱365,400 ₱487,200 Vehicle price ₱1,218,000 ₱1,218,000 ₱1,218,000 60 months 60 months 60 months Payment term (5 years) (5 years) (5 years) Annual interest rate 4.8% 4.8% 4.8% Interest rate for 60 months 24% 24% 24% Monthly repayment ₱20,137.6 ₱17,620 ₱15,103 Total amount of monthly ₱1,208,256 ₱1,057,224 ₱906,192 repayment Total interest over loan period ₱233,856 ₱204,624 ₱175,395 Whichever payment route one chooses to take, at the end of the day it will boil down to who can give one’s cash flow a bigger room to breathe. Choose one that offers the resources which can meet the needs but is still within the financial capacity. The decision shouldn’t be solely based on the overall interest rates, but rather on which one is more suitable to one’s financial standing and capacity. Cost of Owning A Vehicle A car has many other costs than simply the monthly payment. There’s insurance, gas, parking, maintenance, etc. Following this rule of thumb, the total transportation costs should be 10% or less of the gross income. Don’t let your car drive you to the poor house. OWNING A HOUSE Most people would want to have their own homes. Acquiring a property is definitely an option and a dream for most with regular incomes. There is a feeling of security and pride in owning the house one is living in. The ongoing argument is that the house one keeps paying rent for can never be his, while if he takes out a mortgage and pays a little more than his rent amount, the house will eventually belong to him. Below are the advantages and disadvantages which can help in making a sound decision whether to buy or rent a property. Buying a Home Advantages  Owning a home is one of the best investments one can make because it is a great potential in personal wealth as it benefits security and equity.  The value of the house and lot will appreciate over time. So, when the owner decides to sell it, he will earn a profit off the sale.   The owner has control over the property. He can do anything with it. He can alter everything, including the interior and exterior, for his needs and wants.  If the owner does not want it anymore, he can sell it or have it leased for added income.  If he availed a home loan, it will be a good way to improve his credit score if he’s a good re-payer. Disadvantages  It's a huge financial responsibility. Loan payments and house maintenance are never cheap.  Interest and fees, such as association dues, are always present unlike when renting – the landlord pays for these things.  Reselling is not easy especially when the property is located in flood- and earthquake-prone areas.  Owning a home entails real property taxes that have to be paid annually based on the assessed value of the property. Renting a Home Advantages  No ownership and less responsibility. One can come and go as he pleases. He can move out anytime because there's no loan to think about (which can be as long as 30 years).  Save money on maintenance costs because these are shouldered by the owner. He can share the rent, electricity and other bills with anyone he wants.  One can live in an area where he can't afford to buy in. Disadvantages  Rent costs may be as high as the loan payments. One doesn’t have a say in anything. When his landlord sells the property, he has no choice but to move out.  There's restriction – he can't just renovate or fix it. To rent or own a home - that is the question and the answer is: IT DEPENDS on circumstances, priorities, and the soundness of financial position. Tips Buyers / Investors Must Remember Before Buying Any Property Especially If Buying a Single Property If buying from an Individual: Make sure the “Transfer Certificate of Title” is authentic The easiest way to check if the title to the property you are buying is authentic is by getting “Certified True Copy” of the title from the Register of Deeds. This office is usually located at the city or municipal hall where the property is located. Ask the seller of the property for a photocopy of the title (the title number and the name of the owner are needed to get a certified true copy of the title from the Register of Deeds Verify that title is clean Meaning the property is not mortgaged (no debts against the property). It can be seen at the back of the title with the heading “Encumbrances”. This page must be empty if the title is “clean”. But sometimes the space for the technical description of the property on the front page of the title is not enough and the description of the property is continued on the “Encumbrances” page, which is of course all right. Make sure that the land described on the title is really the land to be bought Validate this at the Register of Deeds or by hiring a private land surveyor or a geodetic engineer. Land titles don’t have any street name and number to pin point a property, it is a must to confirm that the actual property matches the technical description on the Transfer Certificate of Title. Make sure that the sellers are the real owners If buying from an individual property owner, ask for identification papers like passport or driver’s license. It is also a good idea to talk to the neighbors to confirm the identity of the sellers (might as well ask some history of the property). Confirm that the yearly real estate taxes are paid Ask for a copy of the Tax Declaration and Tax Receipts to confirm that real estate tax payments are up to date. If buying from a developer: Check for the availability of the mother title Usually, developers offer pre-selling of properties. This means that the houses or condominiums will have to be constructed based on contract over a period of time. The individual title may not be available as this takes up to three years to have the title individualized. Trust a reputable developer who has a track record of completed developments It's ideal to personally check the completed developments to have an idea what it would look like in their pre-selling projects Check every provision of the Contract to Sell that will be signed including the annexes A licensed real estate broker should be able to explain in layman terms all the legal jargons expressed in all documents that need to be signed. One might want to consider hiring a lawyer for this purpose but this is not customary in large project developments as the documents are standardized. All the signed documents will be notarized and the buyer should have a copy of one original notarized document. Choose or negotiate The least cash out, least monthly installments, and if possible, no interest for properties that are yet to be built or on-going in construction would be helpful and of great use. Retention can be negotiated to be paid upon turn-over of the unit. Ask about adjustments that can be done If there is a plan to make some modifications on the inside of the unit whether a house and lot or a condo, make sure that this is allowed by the developer and up to what extent they allow. There are developers who would not allow any changes in their plans but there are those who entertain changes and can be negotiated or discussed before the construction begins. Whether buying from individual owners or from a developer, it's best to choose a Licensed Real Estate Broker or Agent that can be trusted with proven records of good and honest service and has extensive knowledge of the local area. Check for loyalty on previous work experiences. Only choose licensed professionals as the unlicensed (“Colorum”) are now strictly monitored by government authorities and prohibited to practice real estate profession in the Philippines. Even if licensed, have preference over independent brokers/agents compared to in-house agents. The in-house agents of developers are strictly not allowed to sell the projects of their competitors and therefore can be expected to be biased on their own projects Factors To Consider When Choosing or Buying A Home Visit at various times of day This would be very helpful because one can check the surrounding of the property in different hours of the day, examples are traffic noises during rush hour or noise of people on the streets. Also consider the location of the property if it is near public amenities like playgrounds or clubhouses, which would probably generate a lot of noise during the afternoon or weekend mornings. Ask the sellers What problems are they aware of that the house had in the past, even if they’ve been fixed. Be it physical or legal to be assured that there wouldn’t be any additional problems after the purchase of the property. House repairs are a very common issue, from flaky paintwork to leaky sinks, put aside some cash for unexpected property maintenance. Get a home inspection Virtually all houses have defects. Some will be obvious and most can be easily fixed with renovation. But knowing what needs fixing can help in negotiating a lower price – or at least prepare for the costs soon to be incurred. Strongly consider getting inspections not just for purposes of damages, but also with pest. Consider the view It would be useful if there is an open space near the property or if not, a comfortable proximity from neighbors. One wouldn’t want to see another window just 10 meters away and destroy privacy. Ask for utility bills One may adore the stylish architectural style and the big windows or closed walls of home –but bear in mind those almost weekly typhoons during the typhoon season, or the scorching sun during the summer, those minor leak repairs and cooling system payments are beyond affordable. Pay close attention to taxes Don’t just ask what the seller’s most recent tax bill was; ask what several recent tax bills have been. In some areas, houses are re-appraised – and taxed at higher rates – frequently. Reconsider the small details Is there really need for a two-car garage? Or a space big enough for 10 people even if there are only two who are going to live there? It is always important to live within the lifestyle and means, but if there is too much to take care of, might as well re-assess options. Explore the surrounding area Except if one is already familiar with the area he is moving to, take time to walk around the area surrounding the property, there might be illegal settlers around that might lead to unwanted circumstances or there are near small rivers or creeks that might result to flooding during the rainy season. Also, if it is near an airport, a fire station, hospital or train track (expect to hear planes, sirens and ambulances) on a daily basis. Type and location Before buying a condo, have a clear idea of the preferred type and assess whether the condos seen meet the needs. For example, one might prefer to purchase a traditional condominium where one owns everything from the walls in, and don't own the land that the condo sits on. Another option is a condominium hotel, where the condo is rented out when the owner is not using it. Also decide where the condo be situated, such as the preference for a particular city or neighborhood. Within the development itself, the condo's location is also important. One might for example, not want a condo facing a busy street. Perhaps he is looking for a condo that is near to the entrance of a building, or one that has a nice view. Pricing Pricing is the easiest way to ensure that the buyer is on the right track. Take into consideration the area where the unit is bought from, as well as the surrounding building within that area, the usual price ranges of the property, besides the very recent buildings, are usually not far when it comes to prices. Check other options (as much as possible, more or less, as old or as new as what you are looking to buy) and compare the prices of these units. Developer Experience The problem with heated markets is that it attracts amateurs that want to get in on the action. But, more often than not, these products lack quality and design. They may look good on paper, but the underlying issues will make one want to leave the unit faster than he moved in. Try to buy from a local developer that has a portfolio of successful products in the neighborhood. They might be a bit pricey than the others but the quality and (maybe in the future) the resale value would still be good. Try to visit their other projects and get a glimpse from there. Amenities The last thing one wants to discover after buying a condo is that things don't work properly, particularly those amenities that dragged one to buy the unit in the first place. There are, of course, the basic checks, such as making sure that the gas, water and electricity all work. Then there are the more fundamental things like whether the building is properly maintained by the condo association. If, for example, the swimming pool is one of the things that liked best about the condo, make sure that it is cleaned regularly and open at the hours that buyer wants access. Comparison of Owning a House and a Condo Unit House Condo Usually in area with less Usually closer from pollution and less noise, but everything, but in more Environment / Proximity: farther from shops, areas with more pollution / restaurant, work… noise Usually, swimming pool and gym. Sometimes meeting Amenities Usually none room, children’s playing room, …. 100% for the owner within his unit, shared among all Maintenance expenses 100% for the owner unit owner within the building Only the Philippine law applies at the owner’s place. There are no Needs to comply with the additional rules and Rules and regulation rules and regulation of the regulations (except if one admin office of the building lives in a community village where additional rules may apply inside the village) Possibility of extension / Possible Not Possible change The Cost of Owning a House in the Philippines The actual purchase of a house is only half of the financial battle. There are several additional expenses that needs to be taken care of. The costs might also rise, depending on the state of the property. Moving Costs First things first: One needs to transfer all his stuffs from his current place to his new house. If he can cram all his belongings in a standard sedan or an SUV, well good for him. But if he needs to transport heavy furniture, hiring a lipat bahay (professional movers) service is the way to go. The rate will naturally go up if one is moving farther away from his original home. Furnishing Costs One needs all the furniture and fixtures to make his house a presentable one. A bed, a dining set, a sofa, appliances, water and lighting fixtures to name a few. And while a pre- made home will usually have lights and bathroom fixtures pre-installed, the owner still needs to shell out a decent amount of money for these if he is constructing his own place. If the owner is aiming for the kind of home that gets featured in design magazines, he can have an interior designer do over his place. Repair Costs Nothing in life lasts forever: not career, not relationship, and most certainly not appliances and furniture. These will fall apart, and once they do, one needs to shell out money to have them repaired or replaced. That said, it is prudent to be knowledgeable about the warranty clauses and periods of the items being purchased. Maintenance Costs The owner has to spend for his home’s upkeep; otherwise, his house can quickly become a filthy den. He has to regularly spend time mopping floors, dusting furniture, cleaning bathrooms, mowing yard, and scrubbing down kitchen—all grueling tasks. If he wants to hire a full-time housekeeper, he has to pay at least the minimum wage for a kasambahay. The owner also has to check his home regularly for pests as termites, ants, rats, and cockroaches make for horrible housemates. Pest control services can cost a few thousand pesos, depending on the severity of the infestation. Aside from these, there are also renovations and general upkeep—the house’s walls will eventually have to be repainted, the bathrooms re-tiled, and the floorboards replaced. All of these will eventually happen the owner will likely stress about it if he does not have the money needed to accomplish it. Bills When one is living with his parents, it is easy to forget that water, electricity, and telecommunication services all cost money. Having his own place means he will be the only one responsible for these expenses, forcing him to be as sensible as possible when it comes to his utilities. Home Insurance It is best to secure the hard-earned investment in case something goes awry. Insurance companies offer different comprehensive insurance packages and plans to cover everything from theft to water damage to acts of nature. Government Tax This is compulsory when purchasing any real property in the Philippines. The owner has to pay a one-time fee for the Documentary Stamp Tax, the Transfer Tax, Registration Fees and Miscellaneous Fees, plus an annual or quarterly Real Property Tax.